Strategic IT

IT in the downturn – a time to save and prosper

As the economic downturn took hold late last year and organisations started to prepare for difficult times, IT executives were challenged to reign back spending and deliver significant cost savings. A recent survey conducted by A.T. Kearney in conjunction with CIO Magazine highlights the severity of the economic downturn on corporate IT functions. Over a third of businesses reported they were under severe cost pressure and seeking double-digit savings from their IT operations.

With many IT executives uncertain as to the continuing impact on next year's IT budget, prudence may dictate that they prepare for the worst, and reap any unexpected upside to fund IT initiatives that can improve business alignment and agility, and enable greater business value.

Ad hoc vs. formal programme

Figure 1: Ad-hoc cost reduction methods preferred by most IT executives

The survey found that 75% of IT executives only looked at cutting discretionary spend and a short-term freeze or deferral of their IT expenditure to deliver the double-digit savings that they required. Ad-hoc, tactical methods allow immediate action to be taken to protect cash and defer expenditure, without making irreversible or fundamental changes to current ways of working. Examples include delaying upgrades and new project requests, putting in place a travel ban, closely auditing all supplier invoices, reducing printing, and scaling back on storage capacity and bandwidth.

IT executives took this approach despite recognising that such measures alone were an unreliable means of delivering IT cost savings – and were not confident that any savings could be sustained.

Figure 2: Ad-hoc methods recognized as less reliable at delivering / sustaining savings

In practice, a combination of ad-hoc methods and a formal efficiency programme is more effective for delivering both quick wins and significant, sustainable savings. The structured approach of formal cost efficiency programmes involves a rigorous assessment of current costs and cost drivers, and an evaluation of a broad range of potential cost reduction levers. Typically, this evaluation generates an integrated portfolio of initiatives that can be prioritised on a roadmap, based on their benefits and risks. Activities encompass a wide-ranging set of hypotheses and include benchmarking, root cause analysis, activity-based cost modelling, and demand management.

Law of diminishing returns

Although ad-hoc methods have been the weapon of choice so far, CIOs will need to reconsider if the recovery is slow and protracted, as many forecasters are predicting. In such a scenario, cost pressures will resurface and necessitate a second bout of cost cutting. The opportunity to re-employ ad-hoc methods will then be less viable, at least not without leaving IT damaged for years to come.

Clearly, there is a law of diminishing returns at work – you can only cut headcount so much before you start losing critical IT skills and long term capability, you can only delay vital IT expenditure for so long before performance takes a dive and pent up costs become unsustainable, and you can no longer avoid dealing with the underlying drivers of cost when there is little room left to manoeuvre.

Now is an ideal time for CIOs to address the complexity that has built up in their IT infrastructure and operations following a decade of business growth and technological change, and to tackle head-on the root causes of IT costs. A formal cost efficiency programme is an effective approach to guide the reappraisal of the systems architecture, IT organisation design, and IT service delivery model, and initiate bold actions to streamline and optimise IT assets, consolidate and rationalise applications, and reset outsourcing contracts.

The savings would not only be sustainable and double-digit, but allow for the funding of strategic investments and an upgrade of in-house capabilities that will enable better business value in years to come.